Bankruptcy of ‘Illegal’ Banks Leads To Protests In Iran

Iran is facing a wave of protests by customers of several bankrupt credit institutions who have lost their savings. Angry protesters gather in front of government buildings almost on daily basis demanding action against what they believe is large scale fraud and asking for redress.

The crisis has its roots particularly in the expansion of the so-called cooperatives which have been functioning as mini banks, without following standard rules and regulations for many years.

Cooperatives are a simple concept but their banking activities have enormous consequences.

Here is how it works. Several persons create a small association, called Ta’avoni or cooperative to support each other. The Ta’avoni, which can rely on government subsidies, uses the capital invested by its members to engage in business activities, construct or buy houses, or even provide financial services.

The original law on cooperatives was passed in 1971; however the institutions first started to flourish in the 1990s when the government encouraged their creation as part of its effort to privatize the economy.

Over the years, their number climbed to more than 7,000 and their financial activities expanded beyond the original purpose, overlapping with those of conventional banks.

They started to invest in a wide range of fields, pay interest for deposits and provide loans to their customers. Some of them were able to attract hundreds of thousands of depositors by promising much higher interest rates than regular banks.

Usually such activities need permission from Iran’s Central Bank. But experts say that the cooperatives did not seek such permission and their role in banking has been tolerated.

During the era of President Mahmud Ahmadinejad, the central bank was “nice” to cooperatives, Tahmasb Mazaheri, the former head of Iran's Central Bank stated recently in an interview, referring to the fact that the cooperatives were able to operate in a gray area. However when several of them became bankrupt, the government started to label them as illegal.

Victims of financial institutions during a protest in Tehran. The child hold a placard saying, "Where is my daddy's car".

For a long time, Iran’s Ministry of Cooperatives --without having enough qualification in the banking field-- was in charge of issuing permits for credit institutions. Some of them even did not seek any permit. Their work was tolerated, nevertheless.

For the first time in 2007 a law was passed by the Iranian parliament bringing the activities of all financial institutions under the supervision of the Central Bank. But even the Central Bank was too sloppy in regulating them as the authorities now admit.

Lack of proper supervision led to widespread corruption in the cooperatives. The main shareholders were able to use the capital of their institutions for personal gain, buying property end luxury cars for themselves and their relatives.

In 2013, approximately 25% of the cash flow in the country’s financial market was handled by such institutions which were not under the supervision of the central bank, Valiollah Seif, the current president of Iran’s Central Bank announced in July. Since then, he added, the number has dropped to 8%.

In August Seif promised that all “illegal” financial cooperatives will be shut down by the end of the current Persian year (March 21, 2018). At the same time, he asked citizens not to be deceived by higher interest rates offered by “unknown” and “illegal” financial institutions.

The warning came too late for many investors who already had lost their savings.Judicial officials now blame the depositors for their loss and say the government is not responsible. But the fact is that credit institutions were allowed to operate outside banking rules for more than two decades. State media ran their commercials at prime time and the executive or the judiciary branches did not warn people to be wary.

Radio Farda’s economic analyst, Fereydoon Khavand, says that if there was transparency in Iran and the government did its job properly, then depositors could be fully held responsible for the risks they took. “But this is not the case in Iran. People do not even know which institutions are licensed to operate” as proper banks.

For the same reason many people who lost their money due to investment in the so-called “illegal financial institutions” protest on daily basis in different Iranian cities, chant slogans against the head of Iran’s central bank and demand compensation for their loss.